Don’t waste your oil money, IMF warns FG

BY OMOH GABRIEL, BUSINESS EDITOR & EMMA UJAH, ABUJA BUREAU CHIEF
ABUJA—THE International Monetary Fund, IMF, yesterday, cautioned Nigeria against expansionary fiscal policies, given the uncertainty that still pervades the global economic scene just as the Nuhu Ribadu Task Force set up by the Federal Government to review the oil industry has found that the use of crude oil traders was contrary to the global best practice and trend wherein national oil companies develop their own trading arms.

IMF’s Senior Resident Representative in Nigeria, Mr. Scott Rogers, who presented the World Economic Outlook, told journalists, in Abuja that Nigeria must take advantage of the current growth to strengthen her fiscal position by saving for the future, as there is no assurance of early global economic recovery.

His words: “The global economic outlook remains uncertain. The global context has continued to witness slowing growth mostly marked in the advanced economies.

The US housing prices remain depressed and that nation’s weak economy is impacting negatively on many other countries of the world because the US is an export destination of many countries of the world. The US economy is recovering but the recovery is still weak.

“If the world economy remains weak, it will continue to affect countries of the world especially those with strong ties with the US and the Euro area which could actually go into recession. Export growth in Sub-Sahara Africa has remained weak due to the weakening economies of the advanced countries”.

Mr. Rogers said that the situation could be worse if by January, American President Barak Obama fails to reach a deal with the Congress to raise the deficit ceiling, as according to him, “that will mean raise in tax rates and cut in government expenditure across board which could further weaken the growth or even throw the economy into recession”.

The Resident Rep urged the Federal Government to come up with policies to save as much funds as possible and avoid undue increase in government spending, to avoid a burst if oil prices crash.

According to him, the Nigerian economy stands the risk of being faced with lower crude oil prices due to weak global economy and that as such a high oil price benchmark, as being proposed by the National Assembly could hurt the economy.

Therefore, the challenges, he said, is for the nation to generate fiscal surplus while oil prices are high and use it to build the nation’s reserves, rather than drawing it down from the Excess crude Account to be spent. “Stop spending what is meant to be saved. Make the oil price rule effective,” he advised.

Smuggled Nigerian oil accounts for 80 % of Benin consumption

On the petroleum sector, the IMF chief disclosed that about 80 per cent of petrol consumed in Benin Republic is smuggled from Nigeria.

He said that the smuggling which has been on for over 20 years has continued to boom due to the incentive of high profit on the sale of the commodity in that country and indeed other neighbouring countries because Nigeria’s petrol price is the lowest in the region.

“80 per cent of PMS consumed in Benin is from Nigeria. Nigeria’s oil price is the lowest in the region. This has been going on for many years and it is not a new phenomenon. It will continue”, he said.

Mr. Rogers said that Nigeria has been paying for petrol in other nations because of the subsidy policy and that for a nation, which is one of the world’s largest oil producers to be importing fuel and having long queues at fuel stations is an aberration.

“As long as your prices are far below prices in other countries around you, you will always have products smuggling. Wouldn’t you like to have efficient refineries? Wouldn’t you like to see the queues go away.

The funds spent on petroleum subsidy could be redeployed to other critical sectors. Wouldn’t you like to have better-funded educational sector? Wouldn’t you like a better health sector? Better transport system? Nigerians have to make a choice. Nigerians have to decide for themselves”, he said.

The Resident Rep said from an analysis of the Nigeria’s oil reserves in comparison with her over 160 million population, the nation’s wealth is not as much as some people think. He therefore urged that the resources from oil which are depleting assets must be deployed to the expansion of the nation’s economic base.

Nigeria only country that sells crude to traders

Meanwhile, the Nuhu Ribadu Task Force in its report said Nigeria is the only major oil producer in the world that sells 100 per cent of its crude to private commodities traders, rather than directly to refineries.

The Task Force in its report said that various submissions to it demonstrated the potential for lost margins to middlemen, manipulation of pricing, sub-optimal returns and market fraud as emanating from this policy and practice.

The Report said: “It was also observed that some traders lifted crude oil although they were not listed on the approved master list of customers, who had a valid contract and were selected through an annual bidding process.

The Task Force research also found that quite a number of traders did not demonstrate renowned expertise in the business of crude oil trading.

“The Task Force found that legislation governing the industry and agreements with third parties are outdated, do not reflect current economic or legal realities; or include ambiguous clauses. Also, there are some provisions within the legislation that could significantly improve government’s revenue that the government is yet to take advantage of.

Examples include a provision to ensure that the share of the Government of the Federation in the additional revenue shall be adjusted under the Production Sharing Contracts if the price of crude oil at any time exceeds $20 per barrel; and the requirement for a periodic review of provisions in specified time frames”.

The report said: “The Task Force aided by the Consultants identified a total of N137.572 billion ($946.878 million) due to the Federation from SNEPCO representing the proceeds of gas sales from the Bonga oil field; according to the NNPC (NAPIMS) Financial Statements for the year ended 31 December 2009. For Liquefied Natural Gas, the price observed at which the feedstock gas is sold to NLNG seems too generous, compared to prices obtainable on the international market.

The estimated cumulative of the deficit between value obtainable on the international market and what is currently being obtained from NLNG, over the 10 year period, amounts to approximately US$29 billion”.

According to the report “From the Task Force’s review, NNPC is owed N27billion including current debt, total overdue, disputed debt and total debt outstanding, by the major marketers of petroleum products.

We also found that amounts payable to suppliers of petroleum products, as at 31 December 2011 amounts to approximately US$3.6 billion, of which US$2.7 billion represents amounts outstanding for over 365 days.

The Task Force also observed that pipeline product loss has steadily increased over the years. It further said: “From review of the latest available audited financial statements (2009) it was noted that NNPC has sixteen (16) subsidiaries.

The financial performance of the Corporation and its subsidiaries in 2009 shows the Group had a deficit of approximately N298billion for the period. Various reviews conducted by the Task Force showed that the NNPC does not receive the required capital to grow its assets or meet operating costs.

NNPC has therefore increasingly relied on the FGN for lines of credit, and deduction of oil revenue due to the Federation Account. In our review, the legal basis for this practice was unclear”.

Signature Bonus:

The report said that “The Task Force found that discretionary decision-making in the award of oil blocks can result in revenue losses for Nigeria. Our review also showed that the management of past bid rounds has resulted in lower demand and fewer qualified bidders, uncompleted deals weakened government returns, and lowered development of acreage.

The DPR provided the task force with information indicating that 67 licenses were awarded between 1 January 2005 and 31 December 2011; with an outstanding balance of $566 million unpaid in signature bonuses.

For the seven discretionary allocations reviewed, the Task Force found $183million outstanding and due to the nation’s treasury. We were however informed that of the total $749m outstanding in signature bonuses, $321m was legally disputed”.

On Concession Rentals

The report said “The Task Force found that $2.9million represents outstanding amounts to be collected by the DPR from the various concessionaires. However, we also observed inconsistencies in records provided by DPR in respect of information and schedules regarding the list of concessions”.

Royalties (Crude Oil and Gas):

The report said: “The Task Force found that $3.027billion was outstanding from the operators for crude oil royalties as at 31 December 2011 per the DPR’s records.

Of this amount, the DPR had stipulated that ADDAX is liable to pay $1.5billion royalties under the 2003 fiscal regime and there is currently a dispute between Addax and NNPC on the one hand, and the DPR on the other.

In the course of the review, the Task Force also encountered differences in records of payments made to the CBN vis- -vis DPR records, and lack of independent gas production and sales data”.

Gas Flare Penalties:

“The Task Force found that the DPR is currently unable to independently track and measure gas volumes produced and flared and depends largely on the information provided by the operators. We also observed that the periodic reconciliation meetings with the operators to address the gas flare volumes were delayed with only 6 completed of 36 at the time of our review.

The total revenue from gas flaring during the review period was $175million with the balance outstanding as unpaid was approximately $58million indicating that $115million had been received by the DPR.

We however reviewed payments received by the CBN in respect of gas flare penalties. However a review of CBN records showed that $137million was received between 1 January 2005 and 31 December 2011. The DPR was not able to reconcile the $115 million to the $137million.

Lastly, operators have not compiled with the recent Ministerial directive signed on 15 August 2011 increasing the gas penalty fee from N10.00 to $3.50. The operators have continued to flare gas at the rate of N10 and records at the DPR reveal that none of the companies have paid any gas penalty fee in 2012”.

On Miscellaneous Oil Revenues:

“The Task Force said it was unable to obtain a comprehensive miscellaneous oil revenue schedule from the officials of the DPR, although a review of CBN s records provided some information albeit with unexplained variances. The amounts due in respect of the various fees relating to the miscellaneous oil revenues are also not reflective of the current economic realities.

Revenue Losses in the Nigerian Petroleum Industry The Task Force identified sources of revenue losses in the industry, with a view to identify opportunity areas for major reform in boosting resources obtainable from the sector for national development. These include the following.

* Crude Oil Theft and Associated Revenue Losses: Hydrocarbon theft was found by the Task Force as being a major and chronic source of revenue loss to Nigeria. Theft of crude oil and refined petroleum products may be reaching emergency levels in Nigeria.

The Task Force observed various estimates by International Oil Companies and Government officials of the scale and volume of crude theft which ranged from 6 to 30 percent of production.

While the Task Force does not endorse any of the numbers it received, we note that it could actually be as high as 250,000 barrels per day closer to 10% of daily productions amounting to as high as N1 trillion annually. This issue therefore requires immediate attention.

* Lost Refined Products and Associated Revenue Losses: The Task Force did not receive comprehensive figures documenting volumes of refined products stolen or spilled. NNPC reports that thieves stole 3.2 million metric tons of products from its pipeline network between 2001 and 2010 and that about 40 percent of products currently channelled through pipelines are lost to theft and sabotage.

PPMC also recorded 4,468 product pipeline breaks in 2011, 98 percent of them from sabotage; and values the products stolen from its pipeline network between 2001 and 2010 at N178 billion; NNPC Withholdings for Costs Associated With Theft and Sabotage: NNPC withholds oil revenues from the Federation Account to cover costs associated with theft and pipeline sabotage; Pioneer Status granted to Indigenous Companies

The Task Force said it was “informed that at least five companies: Allied Energy, Midwestern Oil & Gas, Brittania Oil Nigeria Limited, Suntrust Oil Company Nigeria Limited; and Niger Delta Petroleum Resources Limited2 have been granted pioneer status by the Nigerian Investment Promotion Commission (with others pending or undetected) for their exploration and production activities.

“The Task Force finds that the granting of pioneer status to oil operators for an activity that is well established for over 40 years inappropriate. The loss of revenue from the grant of pioneer status to oil operators is an avoidable loss and it is recommended that any such further consideration be stopped forthwith and the current ones set aside and or revoked.

Collateral Social Costs of Theft:

“The Task Force also found that certain social costs emanated from crude oil theft and considered them important and requiring urgent attention. These include environmental

The argument that the status is appropriate for exploration and not production is untenable and self-defeating because once it is accepted that production is already being carried on in Nigeria the same goes for exploration pollution and its socioeconomic impacts, armed piracy, and lost investment in the sector leading to revenue losses.

The report stated that “A review of NAPIMS s audited financial statements as at 31 December 2009 showed that Joint Venture cash calls payable was N459.568billion. Since 2006, government has not allocated enough funds to cover these amounts and NNPC has entered into a range of borrowing arrangements referred to as Alternative Financing Arrangements with the costs of financing this debt (estimated at around 8%) continuously mounting.

This cycle will continue to increase in the coming years unless a systemic solution is found. As JV partners there is a need for the effective management and oversight of oil companies operating costs which affects revenues accruable to Nigeria. There is also a clear training, technology and human capacity gap between NAPIMS staff and their counterparts in the private oil and gas sector.

It said that “Equity Crude represents government s share of crude oil production (excluding domestic crude) obtained mainly from three (3) arrangements: Joint Operating Agreements (JOA) with IOCs, Production Sharing Contracts (PSC) and Service Contracts. Equity Crude Oil proceeds are remitted into the Federation account as export proceeds, DPR accounts as Royalties and FIRS accounts as Petroleum Profit Tax.

The Task Force observed that there is no single point accountability for the income and expenditure streams of upstream petroleum operations, compounded by the current structure of NNPC such as multiple roles executed through NAPIMS and its COMD.

A decline was also observed in national investments that would increase the nation s proven reserves. Accordingly, despite the increase in crude oil production in Nigeria over the years, the nation s entitlement has decreased as a result of various alternative funding arrangements for its upstream investments”.